Estate Tax

At the end of last year a tax agreement was reached that allowed for an estate tax exemption to rise to $5 million from $3.5m it had been in 2009. It also raised the gift tax exemption to $5m and lowered the tax rate to just 35% as well as allowed portability of the estate tax exemption for those who died in 2011 or 2012 and were married but did not use up their exemption or provide for tax planning. If no further action were taken in 2013 the tax rate would revert back to just $1m and and 55% rate.

Bloomberg.com reports that the IRS has extended the deadline for heirs to file. The tax agreement that the Congress passed and Obama signed brought the estate tax back for 2011 and provided that some estates could elect to pay capital gains and not have a full step up in basis for income tax purpose but would have no estate tax while others would be able to keep the step up in basis but would be subject to estate tax rates. For the election and next two years subject to the agreement the exemption amount is $5 million dollars per taxpayer with a maximum rate of 35%. Given the frequently changing estate tax rules this helps personal representatives, heirs and their CPAs to have more time to evaluate their estate tax planning decisions.

In 2011 The Gift Tax annual exclusion remains at $13,000 per person per year for outright gifts but the exemption amount was made to be uniform with the estate tax exemption amount so there is now a $5,000,000 exemption for those who have not given prior gifts. However in prior law over the past decade the gift tax exemption was just $1,000,000. Nicholas Cage had already given over $1.8m in gifts though since 2004-2009 and the total he now owed as a result was just under $625,000. As a result they were placing a lien against him.

It is a sad situation continuing his debt of around $14 million that he had previously owed the IRS for income tax issues.

He had sued his manager who he claimed caused his financial ruin regarding those problems demanding $20m although the manager explained it was Cage's own fault and counter sued. It came out that Cage had bought $33m in real estate and 22 cars including 9 Rolls Royce. He had made $24 million in 2010 but needed to sell off many valuable assets he had in order to pay the IRS.

He has another tax situation now as he was late with paying for tax that went well beyond his exclusion amount and would have been due years ago but he forgot to pay the taxes as he was required to after having given the gifts.

This is another example of why this year is such a great year for the wealthy to pass along money to their friends and loved ones. Gift, Estate and Generation skipping taxes for this year and next year will be at a unified $5 million per taxpayer based on the agreement the President made with Congress and enacted into law.

The tax rate is currently at 35% for gift taxes above the exemption amount.

To see the TMZ.com breakdown of the amount of tax he owes for each year 2004-2009 click here

The Internal Revenue Service Commissioner said Thursday that budget cuts proposed by Republicans would have "potentially devastating" impact on the nation's tax system, including a drop in enforcement revenue by $4 billion for the rest of this year.

The Republican-led U.S. House of Representatives passed a bill earlier this year to cut about $600 million from the IRS budget for the rest of 2011.

I.R.S. Commissioner Douglas Shulman said the cuts would lead to drops in customer service, processing and enforcement.

A major part of the agency's recent enforcement efforts involve going after wealthy tax cheats. The IRS is now combing through about 18,000 new returns from those who took part in a tax amnesty program for undeclared assets held abroad.

Republicans at the hearing focused on the impact of the tax code's complexity on business and individual taxpayers, the stated purpose of the hearing.

"Too often we all forget the enormous price in both time and dollars that the individual taxpayer has to pay to comply with the tax filing requirement," said Charles Boustany, the Republican chairman of the subcommittee holding the hearing.

The audit rate for businesses with assets below $10 million is less than 1 percent and for companies with more than $250 million in assets, about 23 percent of businesses are audited, Shulman said.

The biggest companies generally have IRS auditors on site throughout the year.

The IRS collects most of the government's revenue, about $2.3 trillion in 2009. Shulman also said the agency's enforcement role contributes to cutting the federal deficit.

"Our budget more than pays for itself and directly contributes to deficit reduction," he said.

Elizabeth Taylor was well known as one of the most famous actresses Hollywood has ever produced after seven decades in show business she became a major worldwide celebrity and icon. Sadly she passed away Wednesday at 79.

During those seven decades she built a huge fortune through gifts from eight different husbands and numerous boyfriends as well as major success as an actress and business person through building her brand as Elizabeth Taylor which she was one of the first to do. Her overall wealth including the rights to her image, her jewelry and business interests may reach a billion dollars. It is estimated to be worth between $600 million to $1 Billion dollars as estimated by a Businessweek Diane Brady senior editor on The Early Show on Saturday morning.

"But, you know, clearly, they're auctioning off her jewelry collection. They think that's going to be about $150 million. She had real estate that was worth at least $130 million.

"But a lot of the money she made was actually in her perfume business. She had costume jewelry.

"This was an entrepreneur. So it wasn't just an actress who amassed a fortune. She was one of the first people out there basically branding her personality."

"But the perfume business was where she made a lot of her money - even last year, $77 million in sales.

She was the first woman to get $1 million for a movie. But, the reality is, she made most of her money as an entrepreneur."

So what happens to that money now?

"That's a very good question. You've heard, 'Will it go to the dog?' 'Will it go to the manager?' 'Will it go to the kids?' There is a sense a lot of her money will go toward AIDS. That was obviously something that was a big cause of hers. She raised more than $270 million for that through her foundation. Four children, I'm sure she'll give some of it to them. But realistically, I think that a lot of it will go toward the research that she felt was very important."

I think we'll see a lot of money made for and from Liz Taylor for years to come."

Another good question will be whether the family will fight over it and force probate and trust litigation to consume the probate courts and much attention. The 4 children were from 3 different fathers and there were many grandchildren and some great grandchildren who came from her 8 marriages.

Elizabeth Taylor is nearby in the same funeral home as Michael Jackson. While there is only one Graceland possibly if permitted by the facility charges could be taken to come to her final resting place.

It will be interesting to see if her estate planning efficiently passes her property and is as astute as she was or is a mess like Elvis Pressley and other celebrities which squanderd a large amount in poor estate planning.

With 8 different marriages, charities likely being involved and such a blended scenario it will also be interesting to learn whether the beneficiaries will dispute the terms each is probate for and contest the terms of a will or trust or it passes smoothly.

Sometimes when the family is not in harmony or with greedy beneficiaries when there are non titled assets such as jewelry some beneficiaries try to get their hands on the property and sell or take for their own benefits prior to even seeing what the terms of the will says. In her case there was around $150 million dollars worth of jewelry alone nearly all of which was given to her as gifts.

The US Treasury can be relieved she passed away in 2011 while there is a $5 million exemption and not in 2010 when George Steinbrenner and at least 4 other billionaires passed on with no estate tax.

February 14 of last month the Treasury Department released its explanations for the 2012 fiscal year revenue proposals. This also provided the President and his administrations thinking regarding estate tax laws and potential changes they anticipate or what will remain status quo. What they propose is:

For 2011 and 2012, the estate and gift tax exemption is $5 million, and the estate and gift tax rate is 35 percent. The proposal is for 2013 exemption to return to $3.5 million for the estate tax, $1 million for the gift tax, and just over $1 million (inflation adjustments over the past dozen years) for the generation skipping tax.

However, this would essentially be an increase in estate and gift tax and the GOP who are more friendly to the idea of lower taxes have significant congressional weight following the 2010 elections. Many analysts question whether the President who would have liked those prosals for 2010 or 2011 will be able to make those changes.

Portability of the estate and gift tax exemption allows surviving spouses to use their predeceased spouse’s unused exemption, in addition to their own exemption, for gift and estate tax purposes. For example, if wife's estate only uses $1 million of her $5 million exemption in 2011, then her $4 million unused exemption may be used by her husband under the current portability provision so he could have $9 million estate tax exemption. The current portability provision is set to expire Dec 31 2012 but the administration seeks to make this permanent. While this has a decent chance of eventually being law, it cannot be relied on until it is a done deal and signed into law.

The Budget proposals also seek to have the individual income tax rates increase back to the pre-Bush 2001 tax cuts. The highest federal individual tax rate would increase to 39.6% and the 33% federal rate would increase to 36%. The federal long-term capital gain rate would increase from 15% to 20%.

Tom Cohen of CNN wrote an article today discussing that the tax compromise agreed to President Obama and the White House Administration and the Republican leaders in Congress will come to the floor despite threats to prevent it from Democratic leaders in Congress.

Senate Dick Durbin of IL The # 2 leader in the Senate for the democrats said that "If we want to change Washington and move in the right direction we need to stand together and compromise so that he was supporting the bill.

Among its provisions an extension of the Bush era Tax Cuts which the Congressional Budget Office scored as costing $400 Billion. $225 Billion worth in a 2% reduction to the payroll tax for a year.

$57 Billion to extend the unemployment compensation provisions which have already been extended a few times for another 13 months and a $5 million dollar estate tax exemption with a 35% rate.

Congressional Democrats point out that the estate tax change from $3.5 million which congressional democrats agreed to instead of the $1 million with a 55% rate that it was scheduled to go to up to $5 million exemption amount increase its cost from just $25 B for the 2 year term when it had a 45% rate to $68 Billion for the same two year period while only impacting 6600 families during that time. Congressman Paul Ryan a Republican however responded that the estate tax is currently 0 and is increasing to 35% and it is a compromise to move it that much and start the estate tax again but they would not lower the exemption amount. Congress will likely work out this tax dispute soon as it is coming to the floor tomorrow and there are only a few days remaining of the legislative term prior to the holidays and members of Congress going back to their districts.

In a Video from TPM Live Wire on December 2 just a few days prior to the President announcing the tax agreement he had worked out with the Congressional Republicans to have the estate tax exemption moved to $5 million with a tax rate of 35% instead of the no estate tax currently or the $1 million exemption with a 55% rate which can be scene by clicking herecomedian / fake news reporter Stephen Colbert mockingly talks about how the tax is unfair shows a picture of Paris Hilton and jokes about his scaring his rich uncle just prior to the year ending so he does not have to pay estate tax.

As CNN reports President Obama announced an agreement in principle with GOP leaders in Congress which would provide that all taxpayers not merely those below $250,000 maintain the tax cuts. That there be a 2% payroll tax reduction and that the estate tax rates drop to 35% while the exemption amount is reinstated at $5m larger than it has ever been while there is an estate tax. These would be extended for 2 years. In return the GOP would allow unemployment compensation extended for another 13 months and not need to be paid for but be merely added to the deficit as Obama and Democrats would like.

The article does mis state that the estate tax would go to a $3.5 million dollar exemption if no action were taken though. It would actually go to $1m if no action were taken for the estate tax exemption and the rates would be a lot higher. This has not also been agreed to by the Democratic legislative leaders yet though or the full GOP rank and file so it will be interesting to see what happens and there may still be a tax dispute in seeking to pass the legislation.

MSN News reports that his heirs will save $600 million in estate tax as a result of his dying in a year with no estate tax. It will be interesting to see what if any impact this has on federal tax law and whether any legislators now seek to retroactively pass a bill that puts back an estate tax for this year as there had been some talk after a Texas billionaire with about $9b died earlier this year.

As CNN mentions Tax Freedom day 2010 is a theoretical day at which if the worker had worked 7 days a week and did not spend any money would have made enough to pay the IRS for the year. The national tax freedom day for 2010 is 99 days after the start of the year or April 9. It is one day shorter than last year and has declined each year since 2007 given the recession causing less incomes and certain tax provisions were lower or abolished for this year.

More people spend more on taxes than on their food, clothing and shelter combined. Around 30.8% of income goes to pay various taxes each year.

In a similar sense as the tax freedom day it would take most people 35 days of work to pay for food, 13 days to pay for clothing and 60 days to pay for housing. Hopefully something can be done to lower the 50 days that it takes to pay for health care and medical treatments each year. Additionally it takes 21days to pay for recreation and 29 days to pay for transportation.

The tax freedom date is calculated for each state. Florida has a tax freedom day a few days before the national average given its lack of an income tax. Just 19 states have a shorter period and just 3 states have an overall lower tax burden. Florida is one of just 7 states with no income tax. The Florida tax freedom date is April 5.

The states with the shortest are Alaska which also has no income tax and Louisiana which has low incomes. They have a tax freedom date of March 26 for this year. While Connecticut the state with the highest per capita income is the last with their date being April 27. It takes their residents 117 days to pay the taxes they owe.

Bessemer Trust Bank prepared a PDF outline regarding the main changes that Grantor Retained Annuity Trusts (Grats) are going to have under the small business and infrastructure Jobs Tax act which. Assuming it passes in the senate it will then be signed by the President and provide that the minimum term would be a ten year Grat. It will also provide that the payments may not decline during any future year. These rules are designed to significantly minimize those who are seeking to game the system through a series of short term Grats they were confident to live past or have minimal inclusion or were able to time the market more in seeking to reduce their tax exposure. The law will not be retro active but will only impact the ability to do a GRAT without the restrictions after the law becomes law if that occurs so the planning opportunity still exists but may not shortly.